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Two Ran Ponzi Scheme to Finance Resort, U.S. Says

The Panoramic View Resort and Residences is carved into a cliff on the easternmost tip of Long Island, a beacon for New Yorkers who want to relax within earshot of the Atlantic Ocean’s crashing waves during the summer months.

The resort sits on real estate worth tens of millions of dollars, and expensive renovations there were a symbol of Montauk’s transition from a rustic town to a haven for the wealthy. But now it turns out that the whole thing was propped up by a vast Ponzi scheme that siphoned nearly $100 million from 40 investors, including the local fire department.

Federal prosecutors in Central Islip charged the owners of the resort on Thursday with 24 counts of securities and wire fraud using money from several investment funds that they ran to pay down debt on the resort.

The owners, Brian R. Callahan, 43, and Adam J. Manson, 41, investors related by marriage, bought the resort in 2007, according to court documents, just as the sleepy hamlet, long a respite from nearby towns bustling with the rich and famous, began attracting new visitors. Mr. Callahan and Mr. Manson took out loans to cover the cost of the purchase and renovations to convert the resort — once the backdrop for a famous nude photo of the supermodel Christy Turlington — to cooperative houses. They spoke frequently to the press about their plans. If you build it, they will come, the men suggested.

But “they” did not come, prosecutors say now, and Mr. Callahan and Mr. Manson were not able to sell the residences. And when it was time to repay their loans, the brothers-in-law did not have the money. They had several other investment funds, though, filled with millions of dollars from investors who thought their money was going into mutual funds and other traditional investment portfolios.

First Mr. Callahan and Mr. Manson raided the funds, according to the indictment, and then they began the Ponzi scheme in earnest, recruiting new investors to pay fake returns to others who had already invested.

By the end of 2011, the funds had less than 10 percent of the investors’ principal investment, prosecutors said.

Loretta E. Lynch, the United States attorney for the Eastern District, said in a statement that the men “employed all the tricks in the typical con man’s bag,” creating fake documents, stealing identities and engaging in forgery. “The lies stop now,” Ms. Lynch said.

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Among the investors was the Montauk Fire Department, according to a law enforcement official close to the case who was not authorized to speak publicly. The department gave Mr. Callahan $600,000 to invest in mutual funds and other securities. But instead of investing the money, Mr. Callahan diverted it to Panoramic View, prosecutors said, and sent bogus account statements to the department.

Mr. Callahan and Mr. Manson pleaded not guilty in Federal District Court. Mr. Callahan was released on $2 million secured bond, and Mr. Manson was released on $1 million secured bond.

Mr. Callahan’s lawyer did not respond to a request for comment, but a lawyer for Mr. Manson, Robert J. Anello, said in a statement “that Mr. Manson always acted in a manner consistent with the interests of the owners and investors of the Panoramic Property and that claims to the contrary cannot be sustained.”

Prosecutors said Mr. Callahan spent some of the money on fees for his golfing club, down payments toward homes in Old Westbury and Westhampton, and payments for luxury cars.

He also used $475,000 to buy a minority partnership in a company that published archived church sermons on the Internet, according to the indictment.

The charges came on the heels of a lawsuit filed last year by the Securities and Exchange Commission, which makes similar claims. That lawsuit is also seeking money from Sheri Manson Callahan, Mr. Callahan’s wife and Mr. Manson’s sister. Several of her offshore accounts have been frozen.

The resort was open for business as usual on Thursday, and attempts to contact a manager were unsuccessful.

A version of this article appears in print on August 2, 2013, on Page A16 of the New York edition with the headline: Two Used Ponzi Scheme to Pay for Montauk Resort Renovations, Prosecutors Say. Order Reprints|Today's Paper|Subscribe